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15-04-11 The Real Housewives of Wall Street

15-04-11 The Real Housewives of Wall Street

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Published by William J Greenberg
Why is the Federal Reserve forking over $220 million in bailout money to the wives of two Morgan Stanley bigwigs?
Why is the Federal Reserve forking over $220 million in bailout money to the wives of two Morgan Stanley bigwigs?

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Published by: William J Greenberg on Apr 26, 2011
Copyright:Attribution Non-commercial


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The Real Housewives of Wall StreetWhy is the Federal Reserve forking over $220 million in bailout money to the wives of twoMorgan Stanley bigwigs?
America has two national budgets, one official, one unofficial. The official budget is publicrecord and hotly debated: Money comes in as taxes and goes out as jet fighters, DEA agents,wheat subsidies and Medicare, plus pensions and bennies for that great untamed socialist menacecalled a unionized public-sector workforce that Republicans are always complaining about.According to popular legend, we're broke and in so much debt that 40 years from now our granddaughters will still be hooking on weekends to pay the medical bills of this year's retireesfrom the IRS, the SEC and the Department of Energy.Why Isn't Wall Street in Jail?Most Americans know about that budget. What they don't know is that there is another budget of roughly equal heft, traditionally maintained in complete secrecy. After the financial crash of 2008, it grew to monstrous dimensions, as the government attempted to unfreeze the creditmarkets by handing out trillions to banks and hedge funds. And thanks to a whole galaxy of obscure, acronym-laden bailout programs, it eventually rivaled the "official" budget in size — ahuge roaring river of cash flowing out of the Federal Reserve to destinations neither chosen bythe president nor reviewed by Congress, but instead handed out by fiat by unelected Fed officialsusing a seemingly nonsensical and apparently unknowable methodology.
This article appears in the April 28, 2011 issue of Rolling Stone. The issue will be available onnewsstands and in theonline archive  April 15.
 Now, following an act of Congress that has forced the Fed to open its books from the bailout era,this unofficial budget is for the first time becoming at least partially a matter of public record.Staffers in the Senate and the House, whose queries about Fed spending have been rebuffed for nearly a century, are now poring over 21,000 transactions and discovering a host of outrages andlunacies in the "other" budget. It is as though someone sat down and made a list of everyindividual on earth who actually did
need emergency financial assistance from the UnitedStates government, and then handed them the keys to the public treasure. The Fed sent billions in bailout aid to banks in places like Mexico, Bahrain and Bavaria, billions more to a spate of Japanese car companies, more than $2 trillion in loans
to Citigroup and Morgan Stanley,and billions more to a string of lesser millionaires and billionaires with Cayman Islandsaddresses. "Our jaws are literally dropping as we're reading this," says Warren Gunnels, an aideto Sen. Bernie Sanders of Vermont. "Every one of these transactions is outrageous."Wall Street's Big WinBut if you want to get a true sense of what the "shadow budget" is all about, all you have to do islook closely at the taxpayer money handed over to a single company that goes by a seeminglyinnocuous name: Waterfall TALF Opportunity. At first glance, Waterfall's haul doesn't seem allthat huge — just nine loans totaling some $220 million, made through a Fed bailout program.That doesn't seem like a whole lot, considering that Goldman Sachs alone received roughly $800 billion in loans from the Fed. But upon closer inspection, Waterfall TALF Opportunity boasts acouple of interesting names among its chief investors: Christy Mack and Susan Karches.Christy is the wife of John Mack, the chairman of Morgan Stanley. Susan is the widow of Peter Karches, a close friend of the Macks who served as president of Morgan Stanley's investment- banking division. Neither woman appears to have any serious history in business, apart from afew philanthropic experiences. Yet the Federal Reserve handed them both low-interest loans of nearly a quarter of a billion dollars through a complicated bailout program that virtuallyguaranteed them millions in risk-free income.RS Politics Daily: Political news and commentary from Rolling Stone writers and editorsThe technical name of the program that Mack and Karches took advantage of is TALF, short for Term Asset-Backed Securities Loan Facility. But the federal aid they received actually fallsunder a broader category of bailout initiatives, designed and perfected by Federal Reserve chief Ben Bernanke and Treasury Secretary Timothy Geithner, called "giving already stinking rich people gobs of money for no fucking reason at all." If you want to learn how the shadow budgetworks, follow along. This is what welfare for the rich looks like.
In August 2009, John Mack, at the time still the CEO of Morgan Stanley, made an interesting lifedecision. Despite the fact that he was earning the comparatively low salary of just $800,000, andhad refused to give himself a bonus in the midst of the financial crisis, Mack decided to buyhimself a gorgeous piece of property — a 107-year-old limestone carriage house on the Upper East Side of New York, complete with an indoor 12-car garage, that had just been sold by the prestigious Mellon family for $13.5 million. Either Mack had plenty of cash on hand to close thedeal, or he got some help from his wife, Christy, who apparently bought the house with him.The Macks make for an interesting couple. John, a Lebanese-American nicknamed "Mack theKnife" for his legendary passion for firing people, has one of the most recognizable faces onWall Street, physically resembling a crumpled, half-burned baked potato with a pair of overturned furry horseshoes for eyebrows. Christy is thin, blond and rich — a sort of still-awakeSunny von Bulow with hobbies. Her major philanthropic passion is endowments for alternativemedicine, and she has attained the level of master at Reiki, the Japanese practice of "palmhealing." The only other notable fact on her public résumé is that her sister was married toCharlie Rose.It's hard to imagine a pair of people you would
want to hand a giant welfare check to — yetthat's exactly what the Fed did. Just two months before the Macks bought their fancy carriagehouse in Manhattan, Christy and her pal Susan launched their investment initiative calledWaterfall TALF. Neither seems to have any experience whatsoever in finance, beyond Susan's penchant for dabbling in thoroughbred racehorses. But with an upfront investment of $15million, they quickly received $220 million in cash from the Fed, most of which they used to purchase student loans and commercial mortgages. The loans were set up so that Christy andSusan would keep 100 percent of any gains on the deals, while the Fed and the Treasury (read:the taxpayer) would eat 90 percent of the losses. Given out as part of a bailout programostensibly designed to help ordinary people by kick-starting consumer lending, the deals were aclassic heads-I-win, tails-you-lose investment.So how did the government come to address a financial crisis caused by the collapse of aresidential-mortgage bubble by giving the wives of a couple of Morgan Stanley bigwigs freemoney to make essentially risk-free investments in student loans and commercial real estate? Theanswer is: by degrees. The history of the bailout era reads like one of those awful stories aboutwhat happens when a long-dormant criminal compulsion goes unchecked. The Peeping Tom nextdoor stares through a few bathroom windows, doesn't get caught, and decides to break in andsteal a pair of panties. Next thing you know, he's upgraded to homemade dungeons, tri-stateserial rampages and throwing cheerleaders into a panel truck.It was the same with the bailouts. They started out small, with the government throwing a fewhundred billion in public money to prop up genuinely insolvent firms like Bear Stearns and AIG.Then came TARP and a few other programs that were designed to stave off bank failures anddispose of the toxic mortgage-backed securities that were a root cause of the financial crisis. But

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